IDEAS home Printed from https://ideas.repec.org/a/eee/ecolec/v205y2023ics0921800922003433.html
   My bibliography  Save this article

Capitalized value of evolving flood risks discount and nature-based solution premiums on property prices

Author

Listed:
  • Mutlu, Asli
  • Roy, Debraj
  • Filatova, Tatiana

Abstract

Nature-based solutions (NbS) are a cornerstone of climate change adaptation worldwide. Yet, evidence on their economic benefits is scarce, especially since the provided environmental amenities usually spatially correlate with climate-induced hazards, effects of which NbS aim to curb. This lack of empirical evidence creates obscurity regarding social acceptability of NbS, hindering their uptake and upscaling. We apply hedonic price models to estimate homeowners' willingness-to-pay for NbS, which offer flood safety and environmental benefits, while controlling for spatio-temporal changes in capitalized flood risk discounts due to the 1993-1995 floods in the Limburg Province, the Netherlands. We reveal a pre-flood effect of 5.6% (discounting on average -€12,753 for flood-prone properties), which rises to 10.9% (−€24,691 on average) immediately after the floods. However, the effect is only transitory. The flood discount of home values diminishes over time and eventually vanishes in 9–12 years, which coincides with the implementation of the largest and oldest NbS intervention in the Netherlands. Our analysis shows that NbS amenities provide a 15% (€33,687 on average) premium to nearby residential property prices. This evidence of the evolving flood risk discount and the stable NbS premium for individual homeowners could support the economic feasibility and wide acceptability of NbS for climate change adaptations.

Suggested Citation

  • Mutlu, Asli & Roy, Debraj & Filatova, Tatiana, 2023. "Capitalized value of evolving flood risks discount and nature-based solution premiums on property prices," Ecological Economics, Elsevier, vol. 205(C).
    • Handle: RePEc:eee:ecolec:v:205:y:2023:i:c:s0921800922003433
    DOI: 10.1016/j.ecolecon.2022.107682
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0921800922003433
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ecolecon.2022.107682?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Siddharth Narayan & Michael W Beck & Borja G Reguero & Iñigo J Losada & Bregje van Wesenbeeck & Nigel Pontee & James N Sanchirico & Jane Carter Ingram & Glenn-Marie Lange & Kelly A Burks-Copes, 2016. "The Effectiveness, Costs and Coastal Protection Benefits of Natural and Nature-Based Defences," PLOS ONE, Public Library of Science, vol. 11(5), pages 1-17, May.
    2. Lupi, Frank & Graham-Tomasi, Theodore & Taff, Steven J., 1991. "A Hedonic Approach To Urban Wetland Valuation," Staff Papers 13284, University of Minnesota, Department of Applied Economics.
    3. Patrick Bayer & Fernando Ferreira & Robert McMillan, 2007. "A Unified Framework for Measuring Preferences for Schools and Neighborhoods," Journal of Political Economy, University of Chicago Press, vol. 115(4), pages 588-638, August.
    4. Lynne Y. Lewis & Curtis Bohlen & Sarah Wilson, 2008. "Dams, Dam Removal, And River Restoration: A Hedonic Property Value Analysis," Contemporary Economic Policy, Western Economic Association International, vol. 26(2), pages 175-186, April.
    5. Athanasios Votsis & Adriaan Perrels, 2016. "Housing Prices and the Public Disclosure of Flood Risk: A Difference-in-Differences Analysis in Finland," The Journal of Real Estate Finance and Economics, Springer, vol. 53(4), pages 450-471, November.
    6. David M. Harrison & Greg T. Smersh & Arthur L. Schwartz, Jr, 2001. "Environmental Determinants of Housing Prices: The Impact of Flood Zone Status," Journal of Real Estate Research, American Real Estate Society, vol. 21(1/2), pages 3-20.
    7. Charles A. Taylor & Hannah Druckenmiller, 2022. "Wetlands, Flooding, and the Clean Water Act," American Economic Review, American Economic Association, vol. 112(4), pages 1334-1363, April.
    8. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 7.
    9. Joshua D. Angrist & Jörn-Steffen Pischke, 2009. "Mostly Harmless Econometrics: An Empiricist's Companion," Economics Books, Princeton University Press, edition 1, number 8769.
    10. Osberghaus, Daniel, 2015. "The determinants of private flood mitigation measures in Germany — Evidence from a nationwide survey," Ecological Economics, Elsevier, vol. 110(C), pages 36-50.
    11. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 4.
    12. Okmyung Bin & Thomas W. Crawford & Jamie B. Kruse & Craig E. Landry, 2008. "Viewscapes and Flood Hazard: Coastal Housing Market Response to Amenities and Risk," Land Economics, University of Wisconsin Press, vol. 84(3), pages 434-448.
    13. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 2.
    14. Paul Slovic & Melissa L. Finucane & Ellen Peters & Donald G. MacGregor, 2004. "Risk as Analysis and Risk as Feelings: Some Thoughts about Affect, Reason, Risk, and Rationality," Risk Analysis, John Wiley & Sons, vol. 24(2), pages 311-322, April.
    15. Kiku Ichihara & Jeffrey Cohen, 2011. "New York City property values: what is the impact of green roofs on rental pricing?," Letters in Spatial and Resource Sciences, Springer, vol. 4(1), pages 21-30, March.
    16. E. Rollason & L. J. Bracken & R. J. Hardy & A. R. G. Large, 2018. "Rethinking flood risk communication," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 92(3), pages 1665-1686, July.
    17. Jaren C. Pope, 2008. "Do Seller Disclosures Affect Property Values? Buyer Information and the Hedonic Model," Land Economics, University of Wisconsin Press, vol. 84(4), pages 551-572.
    18. Ladenburg, Jacob & Skotte, Maria, 2022. "Heterogeneity in willingness to pay for the location of offshore wind power development: An application of the willingness to pay space model," Energy, Elsevier, vol. 241(C).
    19. Gawith, David & Hodge, Ian & Morgan, Fraser & Daigneault, Adam, 2020. "Climate change costs more than we think because people adapt less than we assume," Ecological Economics, Elsevier, vol. 173(C).
    20. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 1.
    21. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 249-275.
    22. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    23. Hallstrom, Daniel G. & Smith, V. Kerry, 2005. "Market responses to hurricanes," Journal of Environmental Economics and Management, Elsevier, vol. 50(3), pages 541-561, November.
    24. Jantsje M. Mol & W. J. Wouter Botzen & Julia E. Blasch & Hans de Moel, 2020. "Insights into Flood Risk Misperceptions of Homeowners in the Dutch River Delta," Risk Analysis, John Wiley & Sons, vol. 40(7), pages 1450-1468, July.
    25. Votsis, Athanasios, 2017. "Planning for green infrastructure: The spatial effects of parks, forests, and fields on Helsinki's apartment prices," Ecological Economics, Elsevier, vol. 132(C), pages 279-289.
    26. Kousky, Carolyn & Walls, Margaret, 2014. "Floodplain conservation as a flood mitigation strategy: Examining costs and benefits," Ecological Economics, Elsevier, vol. 104(C), pages 119-128.
    27. Terrance R. Skantz & Thomas H. Strickland, 1987. "House Prices and a Flood Event: An Empirical Investigation of Market Efficiency," Journal of Real Estate Research, American Real Estate Society, vol. 2(2), pages 75-83.
    28. Okmyung Bin & Jamie Brown Kruse & Craig E. Landry, 2008. "Flood Hazards, Insurance Rates, and Amenities: Evidence From the Coastal Housing Market," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(1), pages 63-82, March.
    29. Edward Cartwright, 2018. "Book Review:Advanced Introduction to Behavioral Economics," South-Eastern Europe Journal of Economics, Association of Economic Universities of South and Eastern Europe and the Black Sea Region, vol. 16(1), pages 93-99.
    30. Stephen Gibbons & Susana Mourato & Guilherme Resende, 2014. "The Amenity Value of English Nature: A Hedonic Price Approach," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 57(2), pages 175-196, February.
    31. Ajita Atreya & Susana Ferreira & Warren Kriesel, 2013. "Forgetting the Flood? An Analysis of the Flood Risk Discount over Time," Land Economics, University of Wisconsin Press, vol. 89(4), pages 577-596.
    32. Raymond, Christopher M. & Frantzeskaki, Niki & Kabisch, Nadja & Berry, Pam & Breil, Margaretha & Nita, Mihai Razvan & Geneletti, Davide & Calfapietra, Carlo, 2017. "A framework for assessing and implementing the co-benefits of nature-based solutions in urban areas," Environmental Science & Policy, Elsevier, vol. 77(C), pages 15-24.
    33. Beltrán, Allan & Maddison, David & Elliott, Robert J R, 2018. "Is Flood Risk Capitalised Into Property Values?," Ecological Economics, Elsevier, vol. 146(C), pages 668-685.
    34. Brayton Noll & Tatiana Filatova & Ariana Need & Alessandro Taberna, 2022. "Contextualizing cross-national patterns in household climate change adaptation," Nature Climate Change, Nature, vol. 12(1), pages 30-35, January.
    35. Carolyn Kousky, 2010. "Learning from Extreme Events: Risk Perceptions after the Flood," Land Economics, University of Wisconsin Press, vol. 86(3).
    36. Nicolai V. Kuminoff & V. Kerry Smith & Christopher Timmins, 2013. "The New Economics of Equilibrium Sorting and Policy Evaluation Using Housing Markets," Journal of Economic Literature, American Economic Association, vol. 51(4), pages 1007-1062, December.
    37. Jared Carbone & Daniel Hallstrom & V. Smith, 2006. "Can Natural Experiments Measure Behavioral Responses to Environmental Risks?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 33(3), pages 273-297, March.
    38. Sebastian Seebauer & Philipp Babcicky, 2020. "The Sources of Belief in Personal Capability: Antecedents of Self‐Efficacy in Private Adaptation to Flood Risk," Risk Analysis, John Wiley & Sons, vol. 40(10), pages 1967-1982, October.
    39. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 3.
    40. Lauren Knapp & Jacob Ladenburg, 2015. "How Spatial Relationships Influence Economic Preferences for Wind Power—A Review," Energies, MDPI, vol. 8(6), pages 1-25, June.
    41. Kok, Sien & Bisaro, Alexander & de Bel, Mark & Hinkel, Jochen & Bouwer, Laurens M., 2021. "The potential of nature-based flood defences to leverage public investment in coastal adaptation: Cases from the Netherlands, Indonesia and Georgia," Ecological Economics, Elsevier, vol. 179(C).
    42. Kuminoff, Nicolai V. & Parmeter, Christopher F. & Pope, Jaren C., 2010. "Which hedonic models can we trust to recover the marginal willingness to pay for environmental amenities?," Journal of Environmental Economics and Management, Elsevier, vol. 60(3), pages 145-160, November.
    43. Dylan E McNamara & Sathya Gopalakrishnan & Martin D Smith & A Brad Murray, 2015. "Climate Adaptation and Policy-Induced Inflation of Coastal Property Value," PLOS ONE, Public Library of Science, vol. 10(3), pages 1-12, March.
    44. Schaafsma, Marije & Brouwer, Roy & Rose, John, 2012. "Directional heterogeneity in WTP models for environmental valuation," Ecological Economics, Elsevier, vol. 79(C), pages 21-31.
    45. de Koning, Koen & Filatova, Tatiana & Bin, Okmyung, 2017. "Bridging the Gap Between Revealed and Stated Preferences in Flood-prone Housing Markets," Ecological Economics, Elsevier, vol. 136(C), pages 1-13.
    46. Peter N. C. Mohr, 2018. "Sanjit Dhami: The foundations of behavioral economic analysis," Journal of Economics, Springer, vol. 123(3), pages 299-301, April.
    47. Ajita Atreya & Susana Ferreira, 2015. "Seeing is Believing? Evidence from Property Prices in Inundated Areas," Risk Analysis, John Wiley & Sons, vol. 35(5), pages 828-848, May.
    48. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 8.
    49. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 5.
    50. Ewa Lechowska, 2018. "What determines flood risk perception? A review of factors of flood risk perception and relations between its basic elements," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 94(3), pages 1341-1366, December.
    51. P. Bubeck & W. J. W. Botzen & J. C. J. H. Aerts, 2012. "A Review of Risk Perceptions and Other Factors that Influence Flood Mitigation Behavior," Risk Analysis, John Wiley & Sons, vol. 32(9), pages 1481-1495, September.
    52. Speyrer, Janet Furman & Ragas, Wade R, 1991. "Housing Prices and Flood Risk: An Examination Using Spline Regression," The Journal of Real Estate Finance and Economics, Springer, vol. 4(4), pages 395-407, December.
    53. Bin, Okmyung & Landry, Craig E., 2013. "Changes in implicit flood risk premiums: Empirical evidence from the housing market," Journal of Environmental Economics and Management, Elsevier, vol. 65(3), pages 361-376.
    54. Okmyung Biny & Stephen Polasky, 2004. "Effects of Flood Hazards on Property Values: Evidence Before and After Hurricane Floyd," Land Economics, University of Wisconsin Press, vol. 80(4).
    55. Samarasinghe, Oshadhi & Sharp, Basil, 2010. "Flood prone risk and amenity values: a spatial hedonic analysis," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(4), pages 1-19.
    56. Charles R. Plott & Vernon L. Smith (ed.), 2008. "Handbook of Experimental Economics Results," Handbook of Experimental Economics Results, Elsevier, edition 1, volume 1, number 6.
    57. Oshadhi Samarasinghe & Basil Sharp, 2010. "Flood prone risk and amenity values: a spatial hedonic analysis," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 54(4), pages 457-475, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Francesco Caloia & David-Jan Jansen & Kees van Ginkel, 2023. "Floods and financial stability: Scenario-based evidence from below sea level," Working Papers 796, DNB.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Allan Beltrán & David Maddison & Robert J. R. Elliott, 2018. "Assessing the Economic Benefits of Flood Defenses: A Repeat‐Sales Approach," Risk Analysis, John Wiley & Sons, vol. 38(11), pages 2340-2367, November.
    2. Beltrán, Allan & Maddison, David & Elliott, Robert, 2019. "The impact of flooding on property prices: A repeat-sales approach," Journal of Environmental Economics and Management, Elsevier, vol. 95(C), pages 62-86.
    3. James R. Meldrum, 2016. "Floodplain Price Impacts by Property Type in Boulder County, Colorado: Condominiums Versus Standalone Properties," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 64(4), pages 725-750, August.
    4. Netusil, Noelwah R. & Moeltner, Klaus & Jarrad, Maya, 2019. "Floodplain designation and property sale prices in an urban watershed," Land Use Policy, Elsevier, vol. 88(C).
    5. José Armando Cobián Álvarez & Budy P. Resosudarmo, 2019. "The cost of floods in developing countries’ megacities: a hedonic price analysis of the Jakarta housing market, Indonesia," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 21(4), pages 555-577, October.
    6. Georgic, Will & Klaiber, H. Allen, 2022. "Stocks, flows, and flood insurance: A nationwide analysis of the capitalized impact of annual premium discounts on housing values," Journal of Environmental Economics and Management, Elsevier, vol. 111(C).
    7. Justin Contat & Caroline Hopkins & Luis Mejia & Matthew Suandi, 2023. "When Climate Meets Real Estate: A Survey of the Literature," FHFA Staff Working Papers 23-05, Federal Housing Finance Agency.
    8. Wang, Haoying, 2017. "Market Response to Flood Risk: An Empirical Study of Housing Values Using Boundary Discontinuities," MPRA Paper 85493, University Library of Munich, Germany.
    9. Schnellenbach, Jan & Schubert, Christian, 2015. "Behavioral political economy: A survey," European Journal of Political Economy, Elsevier, vol. 40(PB), pages 395-417.
    10. James C. Cox & Vjollca Sadiraj, 2018. "Incentives," Experimental Economics Center Working Paper Series 2018-01, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
    11. Athanasios Votsis & Adriaan Perrels, 2016. "Housing Prices and the Public Disclosure of Flood Risk: A Difference-in-Differences Analysis in Finland," The Journal of Real Estate Finance and Economics, Springer, vol. 53(4), pages 450-471, November.
    12. Gilles Grolleau & Martin G. Kocher & Angela Sutan, 2016. "Cheating and Loss Aversion: Do People Cheat More to Avoid a Loss?," Management Science, INFORMS, vol. 62(12), pages 3428-3438, December.
    13. Meri Davlasheridze & Qin Fan, 2019. "Valuing Seawall Protection in the Wake of Hurricane Ike," Economics of Disasters and Climate Change, Springer, vol. 3(3), pages 257-279, October.
    14. Noah C. Dormady & Robert T. Greenbaum & Kim A. Young, 2021. "An experimental investigation of resilience decision making in repeated disasters," Environment Systems and Decisions, Springer, vol. 41(4), pages 556-576, December.
    15. Döring Thomas, 2013. "John Maynard Keynes als Verhaltensökonom – illustriert anhand seiner Analyse des Versailler Vertrags / John Maynard Keynes as Behavioral Economist – Represented by his Analysis of the Treaty of Versai," ORDO. Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft, De Gruyter, vol. 64(1), pages 27-52, January.
    16. Wagner, Valentin, 2016. "Seeking risk or answering smart? Framing in elementary schools," DICE Discussion Papers 227, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    17. Dave Cliff, 2021. "BBE: Simulating the Microstructural Dynamics of an In-Play Betting Exchange via Agent-Based Modelling," Papers 2105.08310, arXiv.org.
    18. Seung Kyum Kim, 2020. "The Economic Effects of Climate Change Adaptation Measures: Evidence from Miami-Dade County and New York City," Sustainability, MDPI, vol. 12(3), pages 1-19, February.
    19. Maha AbdelHalim & Jean Dubé & Nicolas Devaux, 2021. "The Spatial and Temporal Decomposition of the Effect of Floods on Single-Family House Prices: A Laval, Canada Case Study," Sustainability, MDPI, vol. 13(9), pages 1-18, May.
    20. Pablo Guillen & Danielle Merrett & Robert Slonim, 2015. "A New Solution for the Moral Hazard Problem in Team Production," Management Science, INFORMS, vol. 61(7), pages 1514-1530, July.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolec:v:205:y:2023:i:c:s0921800922003433. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolecon .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.